Evening Market Update

Rise in Oil and Inline Jobs Disappoint

Stocks fell in trading on Friday as traders took profits from Thursday's gain that likely included high expectations for job growth. Friday's labor report, while inline with formal estimates, disappointed higher expectations given prior weak reports and leading indicators of employment. Meanwhile, unrest in Libya heated up and concerns about Saudi Arabia led to a rise in oil, contributing to the day’s losses, although the averages closed above session lows. Additionally, factory orders were better than expected, but Treasuries took their cue from the decline in equity markets. Equity news was light, highlighted by a 21% increase in Dow member Wal-Mart Stores Inc's dividend and a weak earnings report from chipmaker Marvell Technology Group Ltd.

The Dow Jones Industrial Average fell 88 points (0.7%) to 12,170, the S&P 500 Index lost 10 points (0.7%) to 1,321, and the Nasdaq Composite declined 14 points (0.5%) to 2,785. In moderate volume, 1.0 billion shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil rose $2.51 to $104.42 per barrel, wholesale gasoline gained $0.02 to $3.05 per gallon, while the Bloomberg gold spot price added $12.55 to $1,428.55 per ounce. Elsewhere, the Dollar Index-a comparison of the US dollar to six major world currencies-was 0.1% lower at 76.39. For the week, including dividends, the DJIA gained 0.3%, and the S&P 500 Index and Nasdaq Composite advanced 0.1%.

Dow member Wal-Mart Stores Inc. (WMT $52) announced that its Board of Directors has approved a 21% increase in the company’s annual dividend to $1.46 per share, to be paid out in quarterly installments of $0.3650 per share. The world's largest retailer said, "We continue to generate ample free cash flow to fund store growth across all our markets, make strategic acquisitions and deliver returns to shareholders through dividends and share repurchase." The company added that its underlying operations around the world "remain strong." WMT traded around the unchanged mark and closed up modestly.

In earnings news, Marvell Technology Group Ltd. (MRVL $16) reported 4Q earnings ex-items of $0.40 per share, one penny short of the consensus estimate of analysts surveyed by Reuters, with revenues growing 7% year-over-year (y/y) to $901 million, also shy of the $928 million that the Street had expected. The maker of communications chips and leading supplier for Research in Motion Ltd's (RIMM $66) BlackBerry said 4Q results were affected by seasonal declines in its mobile and wireless end markets, but it is "well positioned" to take advantage of the trends in the coming years. MRVL also announced an additional $500 million in share repurchases, but issued disappointing 1Q guidance. Shares fell over 10%.

Payrolls rise roughly inline, but unemployment rate unexpectedly declines

Nonfarm payrolls rose by 192,000 jobs month-over-month (m/m) in February, compared to the consensus estimate of economists surveyed by Bloomberg of a 196,000 increase, and the initially reported 36,000 gain in January was upwardly revised to growth of 63,000 jobs. Additionally, excluding government hiring and firing, private sector payrolls increased by 222,000, versus the forecast of a gain of 200,000, after expanding by an upwardly revised 68,000. The unemployment rate fell again, declining from 9.0% to 8.9%, compared to expectations for the rate to increase modestly to 9.1%. Average hourly earnings were unchanged, versus the Street's forecast of a 0.2% increase, and average weekly hours were also flat at 34.2, versus expectations of an increase to 34.3. Job gains occurred in manufacturing, construction, professional and business services, health care, and transportation and warehousing. Government, specifically state and local, continued to lose jobs, contracting by 30,000 this month.

The release was expected to show a "catch-up" in job creation after three prior disappointing reports, with the January report negatively impacted by weather. Construction and temporary help, two areas that lost jobs in January possibly due to weather, showed gains, although construction remained relatively weak. Leading indicators of potential job creation, temporary help and involuntary part-time both increased, by 15,500 and 291,000, respectively.

The continued downward trend in the unemployment rate is a positive, although the 60,000 increase in the workforce this month was small relative to the steep declines the prior two months. The workforce is expected to grow in future months as employment improves and previously discouraged workers return to look for work, which could slow future declines in the unemployment rate. Meanwhile, job creation remains slow, at a 106,000 average pace over the past year and 136,000 average pace over the past three months. The jobs picture continues to improve, though not as rapidly as we or the Fed would like. Fed Chair Ben Bernanke has said that "until we see a sustained period of stronger job creation, we cannot consider the recovery to be truly established," and New York Fed President William Dudley added that even if we had gains of 300,000 jobs per month, "we would still likely have considerable slack in the labor market at the end of 2012." Additionally, as Bernanke believes the recent rise in commodity prices will only lead to a temporary and relatively modest increase in inflation, and there is little evidence of wage increases to push inflation higher, the Fed is likely to maintain an accommodative stance for now. Meanwhile, cuts at the state and local level adds to the Fed's reason to stay on the sidelines, and although budget problems need to be addressed, the risks in municipal bonds have been overstated.

In other economic news, factory orders rose much more than anticipated, gaining 3.1% m/m in January, above to the increase of 2.0% that economists expected, and December’s 0.2% increase was upwardly revised to a 1.4% gain. January durable goods orders-reported last week-were favorably revised from a 2.7% gain to a 3.2% increase.

Treasuries were higher amid the slide in equities on higher oil prices, which overshadowed the employment and manufacturing demand data. The yield on the two-year note fell 8 bps to 0.68%, the yield on the 10-year note lost 7 bps to 3.49%, and the 30-year bond yield declined 3 bps to 4.59%.

Light day in international data, Middle East and North Africa the focus

Oil prices resumed their solid upward trend, courtesy of lingering anti-government unrest in Libya, and increased protests in Bahrain ahead of a "day of rage" scheduled for next Friday in neighboring Saudi Arabia. Meanwhile, economic news was light, with major releases being a larger-than-expected decline in UK home prices, a much-stronger-than expected increase in the Canadian Ivey Purchasing Managers Index to 67.9 on a jump in employment, and an unexpected increase in Mexico's consumer confidence. Additionally, Mexico's central bank kept rates unchanged at 4.50%, as expected.

Oil continues to seize the market’s engine

The equity markets finished modestly higher this week and continued to be at the mercy of the direction of oil prices, which mostly offset a plethora of economic data that continued to point to a strengthening economy. Both Manufacturing and Non-Manufacturing reports from the Institute for Supply Management (ISM) showed continued strength as both reached multi-year highs, with the employment components depicting expansion, while an unexpected drop in weekly initial jobless claims ramped-up expectations heading into the Friday's Nonfarm Payroll Report. Also, February same-store sales reports-sales at stores open at least a year-were widely better than forecasted and a continuation of major MA announcements boosted the outlook for economic prosperity. However, Middle East and North African anti-government unrest festered and oil prices surged again, fostering uncertainty regarding the impact on the global economy and exacerbating growing inflation concerns.

Amid the backdrop of elevated inflationary pressures, comments from the US Federal Reserve and European Central Bank (ECB) garnered increased attention. Fed Chairman Ben Bernanke noted that the economy continued to strengthen-but job growth remains disappointing-and inflation remains low and the recent rise in commodity prices will likely be "temporary" and cause a relatively modest increase in consumer prices. Meanwhile, ECB President Jean-Claude Trichet warned that "strong vigilance" is needed against inflation, while signaling it could increase its benchmark interest rate at its meeting next month. These diverging views out of the central banks resulted in a slide in the US dollar and increased concerns regarding whether the Fed could orchestrate an exit from its accommodative policy measures in a timely manner to thwart rising pricing pressures from cutting too deep into the consumers' wallets, which could threaten the economic recovery.

Light US economic calendar next week

Next week is expected to be light on US economic data, with the sole major release being Friday's advance retail sales, forecasted to rise 1.0% m/m in February, after gaining 0.3% in January, while sales ex-autos are estimated to grow 0.7%, after advancing by 0.3% in January. Same-store sales results-sales at stores open at least a year-reported by retailers were generally better-than-expected. The retail sales report includes spending at supermarkets and gas stations.

Other releases on the US economic calendar include consumer credit, the NFIB Small Business Optimism survey, MBA Mortgage Applications, initial jobless claims, the trade balance for January, the preliminary University of Michigan Consumer Sentiment Index for March, and business inventories. Releases elsewhere in the Americas include Canada's building permits, housing starts and employment, Mexico’s trade balance and consumer prices.

The international economic calendar will include German factory orders, industrial production, trade balance, CPI and wholesale price index, French payrolls, industrial and manufacturing production, UK trade balance, industrial and manufacturing production, and PPI, Japanese machine orders, machine tool orders, and final 4Q GDP, Australian employment, business and consumer confidence, and Taiwan's trade balance. China will release its trade balance, PPI, CPI, retail sales, industrial production and fixed asset investment, which includes housing and infrastructure spending.

In central bank action, no change in rates is expected at the Bank of England meeting, while New Zealand is expected to lower rates, South Korea is expected to raise rates, and Brazil releases the minutes from its most recent meeting.